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Chart In Focus

Personal Savings Rate is Rising

Chart In Focus
July 09, 2010

A big news items this week was that the Personal Savings Rate in the US rose to 4.0% in May.  That might seem like good news, to see that Americans are saving more and thus taking more responsibility for their wealth accumulation, but a quick look at the data leads to some different conclusions.

This week's chart looks at a comparison of the Personal Savings Rate to the SP500.  We can see that there is a very nice inverse correlation between the two.  Economists complained loudly about the falling savings rate during the 1980s and 1990s, but we see that this was also the period when the stock market was in a long secular uptrend.  The downtrend in the savings rate broke at the same time the long uptrend in stock prices broke.  And the recent rise in the savings rate saw its peak in May 2009, just after the March 2009 market bottom.

There is an interesting cause and effect argument that one can find when examining this data.  Does a falling savings rate help provide more money to the economy and the stock market, thereby fueling the rally?  Or do people save less when they are feeling good about their wealth situation due to a rising stock market?  One can make the case for either argument.

Regarding the recent rise in the savings rate, it is safe to attribute at least some of that rise to the worries people have about the economy in the future, and about the potential for higher taxes and slower business growth.  As such, a higher savings rate functions much like a vote of "no confidence" in individuals' economic future.  If you are about to run out of gas in your car, it is typical to slow down and drive more efficiently in hopes of reaching a gas station.  Spending behavior is similar. 

When we see and understand that there is this inverse relationship between stock prices and the savings rate, then we can also understand that if the savings rate continues to rise, then it will be bad for stock prices.  And anyone who advocates for a return to the high savings rates of the 1960s and 1970s is perhaps unknowingly advocating a return to the type of long sideways choppy stock market structure of that period.

Tom McClellan
Editor, The McClellan Market Report

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